A fresh approach to executive pay?

 Charles Cotton, CIPD Performance and Reward Adviser, @charlesMcotton
Our recent research into executive reward shows there are many explanations why executive pay has increased by so much over the past decade:

·         The increasing sophistication of companies in a global economy

·         The disproportionate value that can be created by a few ‘stars’ in today’s economy

·         Weak remuneration governance in a few organisations that can result in a ‘ratcheting-up’ of pay for the rest

·         Executive pay packages becoming so complex that CEOs are, in effect, having to be compensated for complexity.


It also highlights a number of consequences of high executive pay, which may result in improved, or declining, company performance.

So why is executive reward so complex? One explanation is that until relatively recently, most research has focused on how closely pay is linked with shareholder interests (however defined or measured). However, so far little research has examined the motivational effect of such remuneration packages on CEO’s themselves. With remuneration becoming increasingly sophisticated, and with more pay being deferred over various time periods and incentives made up of share options and performance-based shares, one wonders whether the individuals on the receiving end fully understand what they are being rewarded for. Or, whether they believe that they have any influence on the outcomes against which they will be assessed.
Similarly, there is confusion about how pay is viewed. Not just in terms of how it is defined and measured in economic terms, but in terms of the multiple ways that it is viewed by stakeholders. For instance, in addition to how many things their pay can buy, executives may also take into account what the remuneration package says about their achievements compared to their peers.
For us to get a better understanding about the drivers and consequences of executive reward, I believe that the existing model of executive remuneration needs to adapt. Currently, it is excessively weighted towards alignment and rewarding outputs. In the future, academics and investors need to give more focus to motivation and inputs, such as executive behaviours, as well as organisational purpose, values, culture and trust.
We need fresh thinking about how to reward our chief executives. As the UK moves towards a knowledge and innovation-based economy, CEOs should be rewarded according to how they facilitate a workplace where employees want to work to their best and are unified by a common cause that is underpinned by mutual trust, respect and the free flow of ideas. In such instances, shareholders should consider whether smaller and simpler incentives may be more appropriate.

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